Fixed income investors looking to bolster income streams via investment-grade corporate debt can keep that income while guarding against higher interest rates. A broad swath of exchange traded funds, including the iShares Interest Rate Hedged Corporate Bond ETF (NYSEARCA: LQDH), help with that objective.
In a rising rate environment, bond investors would usually move down the yield curve to limit the negative effects of rising rates as a lower duration bond fund would have a lower sensitivity to changes in interest rates. However, while moving down the yield curve provides a greater level of safety, lower duration bond funds come with less appealing yields as well.
LQDH holds the iShares iBoxx $ Investment Grade Corporate Bond ETF (NYSEArca: LQD), the largest investment-grade corporate bond-related ETF, with short positions in interest rate swaps. LQDH “seeks to mitigate the interest rate risk of a portfolio composed of U.S. dollar-denominated, investment grade corporate bonds,” according to iShares.
Keeping Income
Investors, though, do not need to sacrifice yields to diminish rate risk. Instead, investors can turn to rate-hedged or zero-duration bond ETFs. The group of interest rate-hedged or zero duration ETFs hold long-term bonds but also simultaneously short Treasuries or Treasury futures contracts to hedge against potential losses if interest rates rise.
For its part, the actively managed LQDH, which tracks the Markit iBoxx USD Liquid Investment Grade Interest Rate Hedged Swaps Index, has a 30-day SEC yield of 3.29%. That’s solid when considering the fund’s duration of just 0.16 years. By comparison, the passive LQD has a duration of 8.47 years. Duration measures a bond’s sensitivity to changes in interest rates.